EU rejects U.S. calls to dilute derivatives clearing rules

Huw Jones

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LONDON, Oct 18 (Reuters) - The European Union defended proposed new derivatives clearing rules on Thursday after criticism from the United States, saying the bloc has every right to supervise foreign financial firms that serve EU customers.

The U.S. Commodity Futures Trading Commission (CFTC) chair Christopher Giancarlo threatened retaliation on Wednesday unless the EU watered down the draft rules, which set out tougher conditions for foreign clearing houses doing business in the bloc.

They include allowing EU regulators to directly supervise foreign clearing houses on their home turf in some instances.

For two regulators to air their differences so publicly is rare.

European Commission spokesman Johannes Bahrke said the proposed EU regulations were actually based on existing U.S. rules.

"It is the prerogative of the EU legislator to set the general supervisory framework for central counterparties (CCPs) active in the EU and we would expect third country authorities to respect that, just as we respect the rules and legislative procedures in other countries," Bahrke said in a statement.

"We reiterate that the cooperative oversight we have proposed is modelled for systemically important cross-border CCPs on the United States' own supervisory system," Bahrke said.

The EU rules were drawn up in response to Britain's departure from the bloc, which will result in Europe's biggest clearing house for euro-denominated transactions like interest rate swaps, London-based LCH, being located outside the bloc.

Unless the Bank of England agrees to joint supervision of LCH, the clearer may have to shift euro-denominated operations to the EU or risk losing the business.

The draft rules have led to accusations of regulatory overreach in the United States, home to clearers like CME and ICE.

Giancarlo said that unless the EU rules were watered down so that the bloc's regulators "defer" to U.S. counterparts when it comes to supervising American clearing houses, the CFTC could effectively bar U.S. securities houses from trading on EU exchanges.

Bahrke said the EU is globally the most open jurisdiction when it comes to deferring to equivalent third country regulators, and offers greater deference to the CFTC than vice versa.

"The objective of the proposed new framework of CCP supervision is to maintain that openness and adapt our supervisory framework to the evolving circumstances in European derivatives markets," Bahrke said.